"Trading is statistics and time series analysis." This blog details my progress in developing a systematic trading system for use on the futures and forex markets, with discussion of the various indicators and other inputs used in the creation of the system. Also discussed are some of the issues/problems encountered during this development process. Within the blog posts there are links to other web pages that are/have been useful to me.

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Sunday, 10 April 2011

Coding and testing of AFIRMA completed

Following on from the previous post, the coding of the AFIRMA trend line using the leading function values as a proxy for the "peek into the future" values of price is complete, and I have to say that the results are quite disappointing. Using the rules outlined in the previous post it soon became obvious from cursory scanning of the equity curves that my version AFIRMA trend line did not live up to its early, potential promise. In fact the equity curves were so disappointing that I did not even bother to do the Monte Carlo permutation and bootstrap tests. The equity curves were no better than those produced by my simple benchmark suite of "systems" and the draw downs were such that I would never trade the AFIRMA as a stand alone "system," at least with the rules outlined in the previous post.

Below is a screen shot of the AFIRMA with a window length of 21 (peeks 10 days into the future) shown on the last 150 daily bars of the S&P E-mini. The red line is my version of it, with a Blackman-Harris window, and the yellow and green lines are two original versions with a Blackman and Blackman-Harris window. As can be seen, the original versions are smooth and accurately pick out major turning points whilst my version is not as smooth and gives many false signals that result in losses, even during a trending period.Simple analysis of this chart, knowing the reasoning and coding behind it, shows why my version fails as a directional system. Each time the price moves contrary to any immediately prevailing trend, even those of short duration, the leading functions project this small movement as if it were the turning point of a major cycle and hence one ends up with trades in the opposite direction of the major trend, the result being that one is whipsawed in and out of this major trend. My version of the AFIRMA is simply too sensitive to minor price direction changes and I do not really have an idea as to how I can dampen this sensitivity. Smoothing it would probably be pointless as one might as well just smooth the prices directly.

However, all is not completely lost. The fact that my AFIRMA is so sensitive could be useful in identifying pullbacks in trends, acting as a set up to add to positions or for continuation trades. This is something I may investigate in the future, and this idea has been added to my "to do" list. For the moment I do not think that working more on the AFIRMA would be productive.

For interest, this second chart shows AFIRMA trend lines with a window length of nine (peeks four days into the future). It can be seen that my version of AFIRMA is quite robust in that the two trend lines (this chart and the one above) have different length windows but are almost identical.

1 comment:

Anonymous
said...

It is not good to use regression's result for instant trendline.

The first line is a fited MA line for get parameters to be used in the second line. The second line is a projected regression MA. But, you can project further into future bars. In this way, it is a fast nonlinear regression(autoregression) predicator.

It use spline cubic regression to get 2nd line. This line change too quickly. You can see future bar(line) often changed fast, not steady. If quad regression, then, future bar will not change often.

But, when close or at key R/S zone, you can watch the line, use the line as fast ma crossover signal to exit trade early.